“The Free Market” offers a few excerpts from a presentation by Guoda Steponaviciene delivered to a conference “Explaining and Reducing Poverty in Lithuania: Prospects and Reality” held by the Lithuanian Free Market Institute in co-operation with the United Nations Development Program on 30 May 2002.

Equality or well-being?

In estimating the level of poverty in Lithuania, it is often emphasized that differentiation of wealth has markedly increased after the restoration of independence. This statement is used with a negative connotation. It is asserted that differentiation was not as big in the Soviet times and that growing inequality is now augmenting poverty.

First of all, one may ask whether it is correct to compare the present days with the Soviet era. After all, the differentiation between the privileged and ordinary people was especially big in the Soviet times. It did not always show through the wealth owned. The official statistics, in turn, did not reflect the amount of people’s wealth. Yet, this is natural for a planned economy where status is a person’s wealth. In a market economy, capital is wealth.

However, in terms of the quality and standard of life – the criteria by which poverty is estimated – inequality of opportunities was more than obvious. It is widely believed that ranking people by status in the Soviet Union and Lithuania was unintentional and accidental. Some think that it was not characteristic of socialism, a system that by definition was designed to achieve equality among men.

However, both theory and practice indicate that a planned economy cannot exist without inequality among citizens in terms of status because in the absence of private ownership and free prices there are no other criteria by which goods, which are always scarce, can be divided in society.

In a market economy inequality of wealth is inevitable because people, for objective and subjective reasons, take advantages of opportunities afforded by this order in different ways and to different extents. It is therefore incorrect to claim that differentiation has widened since the Soviet times. Inequality has always existed. What changed together with the transformation of the system is the criteria by which inequality is assessed, while the scope of inequality has widened because the new system has offered greater opportunities to create and obtain wealth.

It should also be taken into account that the general level of wealth was very low in the Soviet times. And it was isolation and ignorance of the opportunities that the capitalist world offered that made people consider themselves not to be poor. However, all of the pride of the people’s state used to evaporate after the first visit to a Western store. Today people from North Korea flee the country, foregoing even privileged status in their homeland for any kind of job in a capitalist country.

Which of the two inequalities – social status or material well-being – does more harm depends on our value judgments. The doctrine of a market economy states that inequality in terms of freedom of action is unacceptable as such, while inequality of wealth is inevitable, no matter whether we like it or not.

It is no use from a practical point of view to discuss whether the existence of differences in people’s abilities to gain wealth is good or bad, just like it is pointless to discuss whether it is good that, say, from the point of view of healthcare, people have different body composition or, from the point of view of education, people have different abilities to comprehend and study one or another discipline.

So in formulating policies of poverty prevention and social security, it is important to consider inequality as a circumstance determined by the wide variety of people as living beings and by differences in the environments in which they live. For this reason reducing inequality and reducing poverty are two different goals, the latter being of prime importance for all societies and all democratic governments.

The Causes of Poverty

When the iron wall separating us from the world collapsed, it did not take long for the world’s standards of life to spread around. People perceived the benefits of goods and services produced around the world much faster than they learned how to create them. This sudden inconsistency between the wants and possibilities incited a great deal of tension. While some people saw it as a stimulus to work more and better, a stimulus to risk and to seek material well-being by all possible means, others did not want or manage to take advantage of it. They failed to put up with it and so found themselves in poverty, if poverty is understood subjectively.

Why don’t some people want or manage to obtain a sufficient amount of money to satisfy their basic needs and not to feel poor?

This problem is particularly conspicuous in “welfare” states because the number of people who find government benefits sufficient to satisfy their needs grows together with an increase in the size of benefits. Benefits, in turn, go up as the standards of living rise (in addition to the right to life, ownership and freedom of expression, people begin to require other rights, such as the right to work, rest, internet and the like), while standards of living rise together with the growth of well-being.

Yet, at some point a limit is reached when wealth can no longer increase because those who live out of this wealth but do not contribute to it become too heavy a burden on society. A time for reform comes. For example, German analysts maintain that their “welfare” state cut the roots of its growth a long time ago and is now living from inertia. This means that a turning point on the growth curve has been missed and the process is descending, while the society continues to think that everything is and will be as always. Under such circumstances it is natural that proposals are being voiced to replace employment regulations, the pension system, the tax code and even the European Union. The problem is that not a single political party dares to admit it publicly. They know that people will be far from happy to learn that time has come to change. After all, avoiding change is human nature.

In Lithuania social benefits, except for benefits paid to large families, are not big. Yet, taking into account the average level of income, especially in small towns and rural areas, social assistance constitutes a valuable portion of people’s income, especially as it is granted in cash rather than in kind. Social benefits thus give birth to a segment of society whose members choose not to seek jobs or take up some business activity but to live on social allowances. The state social security system is viewed as an employer who pays wages-benefits on certain conditions, such as having less income than x, possessing fewer square meters of dwelling than y, having more children than z, being registered in institution alpha but not registered in institution beta and so on and so forth. Meeting these requirements is what many people do for a living, as if being employed. Such incentives affect people’s motivations and behaviour. Families and children – groups that the champions of social security are especially keen to support in words – are affected the most.

People in Lithuania have had merely a decade to learn to be responsible for their own lives and income. It is therefore difficult to single out the consequences of crippled motivations caused by social support, as all of the so-called mentality problems that spring up as a society makes a transition from socialism to capitalism are the outcomes of crippled motivations. Consequences of social support are particularly evident in capitalist “welfare” states that have deep-rooted traditions of social programmes. The Swedish society, for example, is concerned that the youth, being widely and generously supported by the state, comprehend rather late that the time has come to fend for themselves. In Sweden the provision of educational loans has already been restricted. The United States has long debated what effects the provision of allowances for single mothers has had on the status of family and children’s possibilities to live with both parents.

Naturally, there will always be a group of people unwilling to make efforts in order to create material wealth. This circumstance has always existed but it never became a problem in the past because there were no anonymous interventions on the part of the state. They who chose to be poor voluntarily – both those able and unable to work – lived on private charity that was controlled by a concrete community, such as a local community, a voluntary association or a professional group. Since a life in community shapes people’s motivations, this control was sufficient to prevent living on charity from becoming too attractive an occupation. In the twentieth century the state became an active player in social relationships and ousted private charity and control. It became difficult to distinguish between those unable and those unwilling to take care of themselves.

Many Western nations have already perceived the negative consequences that state aid has on people’s life style and on children. They are contemplating different models and trying to figure out what fiscal measures could be used to encourage socially supported people to seek jobs without reducing social benefits. However, all such measures – tax breaks, concessions and allowances – have the same, only much more hidden, effects because receiving benefits will always pay more than paying taxes. The granting of social benefits that are sufficient to guarantee a fairly comfortable life threatens to undermine the foundations of well-being in democratic societies – the ethical norm that in normal conditions everyone has to pay for their well-being themselves, while any kind of government aid is an exemption from the rule.